TY - JOUR
AU - Escobari,Diego
AU - Gan,Li
TI - Price Dispersion under Costly Capacity and Demand Uncertainty
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13075
PY - 2007
Y2 - May 2007
DO - 10.3386/w13075
UR - http://www.nber.org/papers/w13075
L1 - http://www.nber.org/papers/w13075.pdf
N1 - Author contact info:
Diego Escobari
Department of Economics & Finance
The University of Texas - Pan American
1201 West University Drive
Edinburg, TX 78541
http://faculty.utpa.edu/escobarida
Tel: (415) 646-6629
Fax: (956) 384-5020
E-Mail: escobarida@utpa.edu
Li Gan
Department of Economics
Texas A&M University
College Station, TX 77843-4228
Tel: 979/862-1667
Fax: 979/847-8747
E-Mail: gan@econmail.tamu.edu
AB - This paper tests the empirical importance of the price dispersion predictions of the Prescott-Eden-Dana (PED) models. Equilibrium price dispersion is derived in a setting with costly capacity and demand uncertainty where different fares can be explained by the different selling probabilities. The PED models predict that a lower selling probability leads to a higher price. Moreover, this effect is larger in more competitive markets. Despite its applications to several important market phenomena, there exists little empirical evidence supporting the PED models, mostly because of the difficulty of coming up with an appropriate measure of the selling probabilities. Using a unique panel of U.S. airline fares and seat inventories, we find evidence that strongly supports both predictions of the models. After controlling for the effect of aggregate demand uncertainty on fares, we also obtain evidence of second degree price discrimination in the form of advance-purchase discounts.
ER -